A Missed Earn-Out Target Turned Into a Governance Fight

The situation

Sophia, a dentist, and Dimitri, an oral surgeon, had built a combined general and surgical dental practice in Cambridge over eighteen years, operating it through an incorporated professional corporation. When a dental support organization approached them about buying the practice, they were ready to listen. Both were in their late fifties, the practice generated strong and stable revenue, and a sale meant a clean transition into a later, less demanding stage of their careers.

The buyer's opening offer valued the practice at roughly $6,200,000, but structured most of that value around performance rather than paying it all up front. Because provincial rules limit ownership of a dental professional corporation to licensed dentists, the deal could not simply be a straightforward share sale to a corporate buyer. Our team structured it instead as an asset purchase of the practice's equipment, patient charts, leasehold and goodwill, paired with a management services arrangement under which the buyer's organization would handle the business side of the clinic — scheduling, billing, marketing and staffing — while Sophia and Dimitri continued to provide clinical care as associates for a transition period.

Of the $6,200,000, about $4,400,000 was payable at closing. The remaining $1,800,000 was structured as an earn-out — a payment made after closing, contingent on the practice hitting agreed financial targets — split into two annual instalments of $900,000 each, tied to the clinic's gross collections in the first two years after the sale. Sophia and Dimitri liked the structure at the time. It let them share in the upside of a practice they had spent nearly two decades building, and it signalled that the buyer believed in the numbers it was paying for.

What the earn-out clause got right, and what it missed

An earn-out is only as good as the control the seller retains, or is promised, over the period the earn-out measures. Our drafting team had built in a few real protections: a defined formula tied to gross collections rather than a vaguer measure like profit, an audit right letting Sophia and Dimitri review the practice's books during the earn-out period, and a covenant requiring the buyer to operate the practice "in the ordinary course, consistent with past practice."

What the clause could not fully anticipate was how much day-to-day control would shift once the management services organization took over scheduling and staffing. Within the first four months after closing, the buyer consolidated hygiene appointments across two of its Cambridge-area locations, reassigned two long-tenured hygienists Sophia and Dimitri had trained, and shortened the standard recall interval used for scheduling routine cleanings — all decisions within the buyer's business judgment under the new arrangement, and none of them, on their face, outside the buyer's authority to manage its own operations.

By the end of the first earn-out year, gross collections came in at roughly $1,760,000 against a target of $2,100,000 — a shortfall of about $340,000, or just over 16 percent below target. Applying the earn-out formula literally, that shortfall reduced the first-year payment from $900,000 to roughly $754,000. Sophia and Dimitri did not dispute the arithmetic. What they disputed was the cause: they believed the staffing changes and the widened recall interval had suppressed patient volume during precisely the period being measured, and that the "ordinary course" covenant had been breached by decisions that broke from how the practice had always been run.

The buyer's position was that consolidating hygiene scheduling and adjusting recall intervals were standard efficiency moves it made across its whole network, not decisions aimed at the earn-out. Both things could be true at once — a reasonable business decision for the buyer's broader operation, and a real drag on the specific numbers Sophia and Dimitri's payment depended on. That tension is the central risk of any earn-out: the party measuring performance is rarely the party with full control over it once the sale closes.

What we did

1. Reviewed the operating changes against the ordinary-course covenant. Our team compared the practice's staffing and scheduling records from the twelve months before closing against the twelve months after, documenting the hygienist reassignments, the consolidation of appointment slots across locations, and the change in recall intervals as departures from the pattern the covenant was meant to preserve.
2. Retained an accountant to model the revenue impact. Rather than arguing the shortfall in the abstract, we had an accountant estimate how much of the $340,000 gap was plausibly attributable to the widened recall interval and reduced hygiene capacity, using the practice's own historical booking and recall data as a baseline. The estimate came in at roughly $260,000 of the shortfall — not all of it, but a substantial majority.
3. Sent a formal notice under the audit and dispute provisions. The purchase agreement's audit right gave Sophia and Dimitri a contractual path to challenge the buyer's collections figures and the operating decisions behind them, rather than simply accepting the reduced payment or filing a claim in court as a first move. We used that mechanism to open a structured negotiation with a documented factual record already in hand.
4. Proposed a negotiated remedy rather than a full breach claim. A lawsuit alleging breach of the ordinary-course covenant was available, but it would have taken well over a year to resolve, strained an ongoing working relationship during Sophia and Dimitri's remaining transition period as associates, and turned on a factual dispute about causation that neither side could prove with certainty. We proposed instead that the buyer top up the first-year payment to reflect a negotiated share of the accountant's estimate, and revisit the operating changes before the second earn-out year began.
5. Negotiated protections for the second earn-out year. As part of the settlement, we secured a commitment that hygiene staffing levels and recall intervals at the Cambridge location would return to their pre-sale pattern for the remainder of the earn-out period, giving Sophia and Dimitri a fairer shot at the second target without reopening the entire deal.

The outcome

After roughly seven weeks of negotiation, the buyer agreed to raise the first-year earn-out payment from the formula-calculated $754,000 to $850,000 — recovering most, though not all, of the disputed shortfall, without either side conceding the underlying legal question of whether the ordinary-course covenant had technically been breached. Neither side wanted to spend the next year and a half in a dispute over a number that both sides, in the end, agreed was somewhere between the buyer's position and the sellers'.

The second earn-out year unfolded closer to expectations. With hygiene staffing and recall intervals restored to their pre-sale pattern, collections for the year came in at roughly $2,050,000 against the same $2,100,000 target — a shortfall small enough that Sophia and Dimitri did not pursue it further, and the second instalment paid out at roughly $878,000, adjusted only slightly for the modest miss.

Across both years, Sophia and Dimitri collected roughly $1,728,000 of the $1,800,000 in earn-out payments originally contemplated, plus the $4,400,000 paid at closing — a total of about $6,128,000 against the original $6,200,000 headline figure. It was not the clean, fully realized number either side had pictured at signing, and the first-year dispute cost several weeks of stress and a meaningful amount of goodwill during what was meant to be a smooth transition. But it avoided the far larger cost, in money and in relationship, of a breach of contract claim in the Superior Court, and it left Sophia and Dimitri with a result close to what they had bargained for at the outset.

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